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Model Portfolio

Note: BI SHIP - Bloomberg Intelligence Marine Shipping Index

October 2018

Our model portfolio is down 2.5% in the period starting 1 March 2018 to 4 October 2018, but continues to manoeuvre through the headwinds – as evident by the 6.3% outperformance against Bloomberg’s BI SHIP. In this same period, however, the portfolio lagged behind the global benchmark – the MSCI World Index (up 1.2%) – as shipping stocks across the board, with the exception of the tanker sector, weakened. The allocation to stocks of large dry bulk carriers and tanker operators helped minimise losses.

We have modified our strategy to increase exposure to the tanker shipping sector to 47% from 11% earlier as we believe the tanker shipping market has bottomed out.

In terms of portfolio concentration, we have increased the number of stocks in our portfolio from 10 to 13 as we now include more stocks, especially in the tanker and LNG sectors.

March 2018

Our model portfolio gained 2.8% between November 2017 and February 2018, outperforming its sector-specific benchmark – Bloomberg’s BI SHIP (down 4.5%) – as a result of the rebound in the dry bulk and LPG shipping stocks. Meanwhile, the performance of the DMFR model portfolio lagged behind that of the global benchmark – the MSCI World Index (up 5.2%) – as we witnessed a disproportionate correction in global shipping stocks since the start of 2018. Our timely increase in allocation to gas shipping stocks benefited the portfolio as value-buying emerged, particularly in the LPG shipping space.

In November 2017, we increased our allocation of LPG shipping stocks from 7% to 16% on the back of improving demand-supply fundamentals.

The overall LPG vessel fleet is likely to expand 5% in 2018, compared with the average annual growth of 16% in the last two years. We had been confident on the coaster segment since the middle of last year, and our view is substantiated by the increased rates for smaller vessels. Download March 2018 Report

October 2017

This out-performance was a result of the continued recovery in the dry bulk and liner shipping sectors. We have maintained our exposure to liner stocks although we have reshuffled the allocation based on valuations.

Our increased allocation to gas shipping stocks benefited the portfolio as value-buying emerged, particularly in the LPG shipping space. Meanwhile, crude tanker operators continued to reel under pressure and the stocks under our coverage declined since our last update in July. Download October Report

This outperformance was a result of our larger allocation to container shipping companies and port operators. However, at average P/B valuations of 2x for liner companies, most of the positive developments are in the price, and hence we believe it is time to book profit in names such as Maersk and OOIL, which have led the rally in the liner space.

We also trimmed our exposure to port operators in view of the surge in share prices especially ICTSI, which we downgraded to Neutral in May 2017.

February 2017

In 2Q16, we made a tactical shift to increase allocation to the dry bulk sector as we upgraded it to Neutral, backing our conviction of the bottom in the dry bulk market. We downgraded the tanker segment considering its large orderbook, significant dividend cuts ahead and were also discouraged by stagnant asset prices despite healthy freight rates. Our conviction call for 2016, “Long dry bulk, short tankers” generated the highest alpha.

In 3Q16, our portfolio construct was geared for higher risk and we increased our allocation to the dry bulk sector to 42% as we expected the upward trend in stock prices to resume after a period of consolidation in 2Q16. The trade played out handsomely as our portfolio generated a return of 40% between October 2016 and February 2017.

Our portfolio defied a terrible year for the industry to produce a 38% return in our first year out. The model portfolio markedly outperformed the benchmark indices, BISHIPGP Index (Bloomberg Intelligence Marine Shipping Index, 14%) and MSCI World Index(19%) by a big margin.

For 2017, lowering allocation to dry bulk stocks; increasing weightage on container trade. We have reduced our allocation to the dry bulk segment to 31% from 42%. The value play is over in our view and we believe stocks could be at the risk of “too soon too fast” in the near term. Conversely, we believe that the worst is over for the container shipping and we see higher returns for the sector in 2017-18. We have increased the allocation to the sector from 8% to 27%. The port sector is another major constituent of our model portfolio for 2017 as world trade recovery gathers steam and earnings remain resilient for our portfolio constituents.

We are Neutral on gas shipping as we believe the stocks are trading in a fair territory, while we maintain our Unattractive stance on tankers.

October 2016

Our model portfolio outperformed key benchmark indices from June to October, although it is still down 6% from February 2016. The portfolio generated annualized returns of 15.7% during the four-month period starting from 16 June 2016.

We continue to stick to our thesis that dry bulk names will be the outperformers in 2017, and have added Star Bulk Carriers because of its high spot exposure and large Capesize fleet.

We have increased allocation to the Port sector as the global throughput growth is stabilising and hence earnings will remain resilient in our view; we have included China-COSCO Ports and ICTSI.

June 2016

We made a tactical shift to increase allocation to the Dry Bulk sector in June 2016 as we believed the bottom had been reached early in the year. Meanwhile, we downgraded the Tanker segment to Neutral on increasing vessel supply.

We reshuffled our portfolio to play the recovery in the Dry Bulk shipping sector albeit from a very low base, and believed that the beaten-down Dry Bulk names could provide superior risk-adjusted returns.

About our Model Portfolio

In 2016, Drewry Maritime Financial Research (DMFR) launched a model portfolio - selecting stocks within the global maritime space to ensure a balanced approach to managing risk in a low return environment.

Recommended stocks are hand-picked based on the fundamentals of each entity, coupled with near-term triggers. The objective of the model portfolio is to generate optimum returns in conjunction with moderate risk.It is important to note that shipping is a high-beta sector; it is therefore not uncommon for shipping stocks to under-perform or out-perform the financial markets by a wide alpha.

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